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The JOBS Act and SEC Deregistration: New Thresholds and Special Considerations for Banks and Bank Holding Companies


The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted on April 5, 2012, established, among other things, new shareholder headcount thresholds relating to SEC registration. For banks and bank holding companies (“BHCs”), registration and reporting under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is required for any class of securities held by more than 2,000 shareholders of record as of the end of a given fiscal year, and deregistration is permitted for any class of securities held by fewer than 1,200 shareholders of record under the timing rules described below. The reports in question include annual (10-K), quarterly (10-Q) and periodic (8-K) reports; proxy statements; Forms 3, 4 and 5; Schedule 13D and 13G reports; and other reports required under the Exchange Act.

The JOBS Act allows a bank or BHC to terminate its registration under Section 12(g) of the Exchange Act effective 90 days after filing a Form 15 certifying that it has fewer than 1,200 shareholders of record. For a bank/BHC that currently has fewer than 1,200 shareholders of record, termination can be effected without a stock buyback, share reclassification or other “going-private” transaction. Instead, a board resolution, Form 8-K, press release and, if desired, a letter to shareholders would be all that would be required. This is frequently referred to as “going dark” or “turning off the lights.” The new thresholds also apply to going-private transactions, however, and banks and BHCs that did not previously have the resources to cash out a significant number of shareholders or that had more shareholders of record than could be accommodated reasonably in multiple classes of stock via a share reclassification transaction may wish to revisit the idea of going private in the wake of the JOBS Act.

A bank or BHC that terminates its Section 12(g) registration and reporting obligations will remain eligible to avoid re-registration and reporting so long as it has fewer than 2,000 shareholders of record (or 1,200 if it has ever previously filed a registration statement for an offering of securities under the Securities Act of 1933, as amended (the “Securities Act”)), at the end of a given fiscal year.  Examples of Securities Act registration statements include Forms S-1 (public offering), S-3 (short-form public offering), S-8 (employee benefit plans) and S-4 (business combinations). The different threshold for companies that have previously filed a registration statement arises from Section 15(d) of the Exchange Act, which requires such companies to file periodic reports under the Exchange Act for the remainder of the fiscal year in which a Securities Act registration statement was declared effective.

The decision to deregister involves balancing the advantages and disadvantages of “going dark” to the bank/BHC and its shareholders, and each bank or BHC will need consider the issues in light of its particular facts and circumstances. In general, relevant considerations include:

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JOBS Act Timing – Regulation D and Shareholder Thresholds

On March 27, 2012, the House of Representatives approved the version of the JOBS Act, as amended by the Senate, by a vote of 380 to 41.  Accordingly the legislation has been sent to President Obama for signature, who has previously indicated his support of the legislation.  The White House has indicated that the President anticipates signing the JOBS Act early in the week of April 2, 2012.

The text of the final JOBS Act is available here.  We have previously summarized the provisions of the JOBS Act generally applicable to the community banks, as well as the impact of the Senate amendment to the JOBS Act.  In this post we focus on the timing implications for effectiveness of the amendments to Regulation D and shareholder thresholds for SEC registration and deregistration.

With regard to Regulation D, Section 201 of the JOBS Act requires the SEC to eliminate the prohibitions on general solicitation and general advertising in connection with Rule 506 and Rule 144A offerings, so long as the securities are only sold to accredited investors and qualified institutional buyers, respectively.  The JOBS Act requires the SEC to implement these changes no later than 90 days after the JOBS Act is signed by the President.  Until the SEC amends the existing regulations, general solicitation and general advertising will remain prohibited.

With regard to the shareholder threshold changes, Sections 501 and 601 of the JOBS Act immediately amend the statutory provisions related to the number of shareholders of record at which a company must register and when the company is permitted to register.  The statutory changes are effective immediately upon enactment of the JOBS Act.  However, the SEC has also adopted regulatory requirements based on the original statutory language that will likely need to be amended in order to fully take advantage of the revised thresholds.

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Senate Adopts Slightly Amended JOBS Act Bill

On March 22, 2012, the U.S. Senate adopted H.R. 3606, the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act) by a vote of 73 to 26.  Prior to its passage, the U.S. Senate adopted Amendment 1884 proposed by Senators Merkley and Brown that replaced the “Crowdfunding” exemption contained in the house-passed legislation with a narrower provision.  As the Senate and the House have adopted different versions, the House will have to consider and pass the Senate amendment before a bill could become law, or convene a conference committee to reconcile the House and Senate versions of the bill.  (The Senate rejected by a voice vote Amendment 1931 proposed by Senator Reed that would have changed the SEC’s shareholder counting rules from record holders to beneficial owners.)

As the bulk of the JOBS Act was approved without change, our summary of the impact of the JOBS Act on community banks remains accurate.

The amended “Crowdfunding” provision includes significant restrictions on the potential utility of the new exemption, particularly for how it may have utilized by community banks.  The ultimate utility of the Crowdfunding exemption will largely be tied to the implementing regulations to be adopted by the SEC.  Under the Senate’s version of the JOBS Act, the Crowdfunding exemption would be available for up to $1 million in issuances in any 12-month period, require investors to purchase no more than 5-10% of their net worth in the issuance, and require the use of either a broker or “funding portal” as that term is defined in the bill.

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Impact of Proposed JOBS Act on Community Banks

While still in proposed form, and subject to significant political uncertainty, we offer this summary of the impact of the Jumpstart Our Business Startups Act (a.k.a., the JOBS Act).  This summary is based on the version that passed the House on March 8, 2012, and was brought to the Senate floor on March 19, 2012.  On March 20, 2012, the Senate failed to achieve sufficient votes to substitute the JOBS Act for the INVEST in America Act of 2012 (technically, it would have been the “Invigorate New Ventures and Entrepreneurs to Succeed Today in America Act of 2012,” but I think the acronym is a LOT better in this case), which contained some similar, but not identical, provisions.  Accordingly, it appears that the JOBS Act, as adopted in the House, may be voted upon by the Senate this week.

Emerging Growth Companies

The bulk of the JOBS Act, and focus of most of the congressional debate, is on the creation of a new class of registered companies deemed “Emerging Growth Companies.”  These registrants are not limited by business operations, and banks and bank holding companies could quality.  An Emerging Growth Company would generally consist of newly public companies (IPO registration statement effective after December 8, 2011), with market caps of less than $750 million and total gross annual revenues (presumably interest income plus non-interest income for banks) of less than $1 billion.  New registrants could quality for Emerging Growth Company status for up to five years following their IPO, at which time they would lose the advantages of being an Emerging Growth Company even if they otherwise continued to qualify.

An Emerging Growth Company would be exempt for the say on pay vote, as well as pay vs. performance and pay equality disclosures, and would not be required to have independent auditors attestations regarding internal controls under SOX 404.  In addition, they would be eligible to generally rely on the scaled disclosures otherwise permitted for smaller reporting companies.  In addition, an Emerging Growth Company would be provided the opportunity to initially file their draft IPO materials confidentially with the SEC and otherwise have greater flexibility in communications with regard to their IPO.

Modification of Securities Offering Exemptions

Within 90 days of passage, the SEC would be required to amend Regulation D and Rule 144A to permit general solicitation and advertising in Rule 506/Rule 144A  offerings so long as the securities are only sold to accredited investors or qualified institutional buyers, respectively.

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SEC Advisory Committee Recommends Relaxing Restrictions on Solicitation and Advertising in Private Offerings

On January 6, 2012, the Advisory Committee on Small and Emerging Companies established by the Securities and Exchange Commission (“SEC”) recommended that the SEC take immediate action to permit general solicitation and general advertising in private offerings of securities under Rule 506 of Regulation D where securities are sold only to accredited investors. Relaxing the current restrictions on general solicitation and advertising would facilitate the ability of companies to raise capital from accredited investors, who are generally viewed as able to fend for themselves. For example, relaxing these restrictions would make it easier for companies to publicize their financing plans and seek funding from investors without any pre-existing relationship.

Rule 506 of Regulation D provides a widely-used safe harbor from the registration requirements of the Securities Act of 1933 for qualifying private offerings. Under current Rule 506, neither the issuer nor any person acting on the issuer’s behalf may offer or sell securities by any form of “general solicitation or general advertising,” and securities sold pursuant to Rule 506 may only be sold to “accredited investors” or persons who, either alone or with a representative, have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of a prospective investment.

The Advisory Committee is of the view that the restrictions on general solicitation and advertising prevent many privately held small businesses and smaller public companies from gaining sufficient access to capital sources and thereby materially limit their ability to raise capital through private offerings. The Advisory Committee noted that the investor protections afforded by the existing restrictions on general solicitation and general advertising are not necessary in private offerings where the securities are sold solely to accredited investors. Because the concepts of general solicitation and advertising are vague, the prohibition increases compliance and diligence costs for issuers of securities who seek to avoid potential activities that might be deemed to constitute general solicitation or advertising and thereby destroy the availability of the Rule 506 safe harbor.

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Financial Services Update – December 30, 2010

Cuomo Announces Settlement with Rattner

On Thursday,  New York Attorney General Andrew Cuomo announced that Quadrangle Group principal Steven Rattner has agreed to pay $10 million and refrain from doing business with any New York pension funds for five years, however the settlement does not require Rattner to admit any wrongdoing. The settlement was in response to Cuomo’s investigation of Rattner’s alleged role in a scandal involving the state’s public employees’ pension fund. Rattner already agreed to pay $6.2 million to settle a separate Securities and Exchange Commission case related to its pay-to-play investigation. The SEC settlement also prevents Mr. Rattner from associating with any investment adviser or broker dealer for two years.

Treasury Announces Six More Banks Repaid TARP Loans

On Wednesday, the Treasury Department announced that six more banks had repaid the government loans received through the Troubled Assets Relief Program, or TARP. The Treasury also said that out of $389 billion disbursed through TARP, the government had received repayments of $235 billion plus dividends and other payments totaling $35 billion, for a grand total of $270 billion. Banks repaying the government on Wednesday included East West Bancorp of Pasadena, CA; Webster Financial of Waterbury, CT; 1st Source Corporation of South Bend, ID; Surrey Bancorp of Mount Airy, NC; Nationwide Bankshares of West Point, NE; Haviland Bancshares of Haviland, KS.

Christmas Week Jobless Claims Drop

On Thursday, the Labor Department announced that jobless claims for the week of Christmas dropped to a level that has not been seen since July 2008. The number of people filing for unemployment fell by 34,000 to a seasonally adjusted 388,000 the week ending December 25. The four-week moving average decreased by 12,500 to 414,000 from 426,500. New filings have been hovering below 450,000 a week since the beginning of November. The Labor Department reports next Friday on the number of jobs added and the unemployment rate in December which is based on a survey taken in mid-December.

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